First Executive Unit Told to Stop Writing Policies

In a significant regulatory action, the New York Department of Insurance on Thursday ordered the New York subsidiary of First Executive Corp. to stop writing new business until it can demonstrate that the interests of existing policyholders are protected.

The regulators also directed the company, Executive Life Insurance Co. of New York, to boost its reserves by $125 million.

Kevin Foley, deputy superintendent of the New York insurance department, said that regulators are continuing to examine the company and expect to know next week whether further action is necessary.

“We are not now poised to take the company over, but we are clearly signaling that this is a serious situation that demands immediate attention both from a regulatory point of view and from a company management point of view,” Foley said.

Although other states have taken similar steps against First Executive, the regulatory action in New York is considered the most important to date because it effects the firm’s second-largest market.

And it raises the possibility that California regulators might take similar or even stronger action soon against the troubled, Los Angeles-based life insurance holding company. California is the firm’s biggest area of operation.

A First Executive spokesman said the company will comply with the New York insurance department’s order. Executive Life of New York has about 110,000 policyholders and $3 billion in assets. It is First Executive’s second-largest subsidiary.

California regulators currently are examining the books of Executive Life of California, the company’s largest unit with about 300,000 policyholders and $10 billion in assets. They are expected to complete their financial review within a few days.

Although regulators were aware of the action in New York, they refused Thursday to speculate about whether similar moves would be taken in California.

The regulator actions are just the latest in a series of events that have battered the once high-flying company in recent weeks.

Earlier this week, First Executive Corp. announced a $466-million fourth-quarter loss. The company’s auditors have questioned its ability to stay in business. A major debt rating firm has cut its rating on Executive Life’s ability to pay claims.

The company said in a regulatory filing this week that new business has come to a near standstill, while the value of its investment portfolio has fallen dramatically.

Most of the company’s woes are the result of defaults on high-risk, high-yield junk bonds held in Executive’s investment portfolio. During the past two years, companies that sold more than $2.28 billion worth of these bonds to the Los Angeles-based insurer have filed bankruptcy or simply stopped paying interest on their debts, First Executive said in a filing. That forced Executive to add to reserves for securities losses and write down assets, resulting in roughly $1.2 billion in net losses during the period.

The company said it believes that its investment portfolio has deteriorated even more in the past few months. The financial cushion of its insurance subsidiaries may have fallen below required levels, the company added. That gives insurance regulators “broad discretionary authority” to take control of the insurance firms, the company said in a filing.

News of the losses has spurred worry among the company’s policyholders. Customers holding accounts worth about $3.5 billion withdrew their funds last year after the company’s troubles were revealed, and that worsened the already dismal financial situation.

State insurance regulators in several states have said they are examining the company’s books. However, they refused to elaborate on any action they might take against the companies.

New York’s Foley will say only: “We are prepared to do whatever is necessary to protect policyholders.”